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Reinsurers' Profits to Recover in 2012, Face Risks In 2013

Source: Dow Jones

Posted on 04 Sep 2012 by Neilson

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Fitch RatingsThe world's top reinsurers are expected to see increased profits in 2012 as far milder catastrophes so far this year mean lower payouts, unlike last year when reinsurers' profits were dented by several major catastrophes, including a devastating tsunami and earthquake in Japan, Fitch Ratings said Monday.

At the half-year, the insured losses covered by insurers and reinsurers was worth only around $12 billion, significantly lower than the $81.7 billion in insured losses in the same period last year.

However, Fitch said earnings of reinsurers could be hit in 2013.

"While 2012 earnings are likely to improve, low investment yields and questions over the sustainability of prior-year reserve surpluses will make it more challenging for reinsurers to maintain profitability levels in 2013," said Chris Waterman, managing director in Fitch's EMEA Insurance rating group.

Mr. Waterman said earnings may also be hit next year if the so-called "catastrophe burden" of reinsurers increases, with the amount of insured losses from catastrophes expected to increase to more "normal" levels of around $30 billion-$ 35 billion, which is the average seen over the past 10 years.

Insured losses are different from economic losses. Economic losses are greater than insured losses because they take into account all damages from a catastrophe, whereas insured losses take into account only those damages which were covered by insurance.

For example, the total economic loss from the earthquake and tsunami in Japan is estimated to be around $210 billion. However, the insured loss was worth a smaller $35 billion-$40 billion.

Together with the expected boost to earnings this year, reinsurers are also expected to strengthen their levels of capitalization as the price of reinsurance continues to increase, albeit at a slower pace, Fitch said.

Fitch's tally of the reported level of capital, or shareholders' equity, of 24 of the biggest non-life reinsurers in the world show a total of $345 billion in the first half of this year, Fitch said.

This is up from $313 billion in the first half of 2011.

Fitch said this "already-strong capitalization" is expected to improve this year, exceeding the reported capitalization of $362.6 billion last year.

Fitch said that, in general, the outlook for the global reinsurance sector remains stable, supporting reinsurers' current ratings over the next one to two years.

"Our expectation is that the predominant rating action over the next 12 to 24 months is going to be an affirmation of the current rating level, with a stable outlook," Fitch Ratings Director Martyn Street said in a briefing.

Of the 24 large non-life reinsurers covered by Fitch, 78% are rated with a stable outlook, 11% are positive and 11% are negative.